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Domestic Airlines Fly High in Foreign Skies
Jun 27, 2017

India's aviation industry is on a high-growth trajectory. India's domestic air passenger traffic has almost doubled in the past six years. This is on the back of strong economic growth and emergence of low-fare airlines. Indian carriers have now set their sights on International traffic. Indian carriers have been slowly increasing their market share. It is important to note that foreign carriers still dominate international traffic to and from India.

As per the report by rating agency ICRA, the share of domestic airlines in India's international traffic increased from 30.1% in FY14 to 35.1% in FY17. In the coming years, this share is expected to increase as the government replaced the 5/20 rule with 0/20 rule. The 5/20 rule mandates that airlines need to fly at least 5 years domestically and should possess 20 aircraft. The new 0/20 rule does away with the five-year requirement, but carriers will still need to demonstrate a fleet of 20 aircraft.

Why are air carriers focusing on international traffic? Indian carriers are chasing international routes to increase their revenues and profit margins. International routes traditionally deliver higher margins for airlines.

But does this mean international routes are more profitable than domestic ones? Not really. If you see the recent results of air carriers such as Jet Airways and Indigo, the international segment did worse than the domestic business in FY17. This is due to higher competition, weak international market (particularly Gulf region) and higher cost.

It is important to note that certain industries have relatively dull economics compared to others. And investors would do well to keep this in mind, particularly in the case of aviation. Investors need to understand the industry dynamics before buying up aviation stocks.

Data Source: ICRA, Business Line

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